Winners and losers: The best and worst performers in GCC equity markets last year

Recent wobble in global markets threatens to close potential window for IPOs

Image for illustrative purpose only. A broker looks at a screen in the Dubai Financial Market December 23, 2009.

REUTERS/Ahmed Jadallah

Michael Fahy,
ZAWYA

The Gulf's equity markets may have endured something of a rocky ride in 2017, and, after a bright start this year, look set for more uncertainty, at least in the short-term.

Higher oil prices had led to all of the Gulf Cooperation Council’s stock markets posting gains in the first month of the year - except for Oman, which fell by 1.9 percent – but the global sell-off in equity markets around the world in early February led to some of these gains being reversed.

The uncertainty created by the sharp decline in equities could threaten to sharply close what was seen as a window for potential successful initial public listings (IPOs), following the flotation of Dubai’s Emaar Developments in November and Abu Dhabi’s ADNOC Distribution one month later.

Last month, Oman-based U Capital identified in a note up to 30 companies that are said to be planning an IPO this year, with the biggest and most high-profile being Saudi Aramco, which may not yet have decided where to host its international listing, but which is due to list on Saudi Arabia’s Tadawul index this year.

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It could be joined by a range of other listings on GCC markets, with U Capital identifying Abu Dhabi Ports, Emirates Global Aluminium, Senaat, Dar Al Arkan's property arm and the Kuwait Stock Exchange as other likely listings, conditions permitting.

"We believe early 2018 would be an opportune time for the companies to go public as oil prices would continue to remain higher, supported by output cuts," it said, explaining that the window of opportunity may soon close again. "Later on, we expect shale producers to bounce back with higher production and drag the oil prices down," it added.

Mazen Al Sudairi, the head of research at Al Rajhi Capital, believes that the IPO of Saudi Aramco "will be a fundamentally important moment for Tadawul", which will change the entire structure of the market. He added that the potential inclusion of Tadawul into emerging markets indices compiled by FTSE Russell and United States-based MSCI could also provide a boost, as could the improving oil price.

"At the end of the day, market values are based on earnings. The level of earnings declined over the past two years, due to which, the market multiple traded under the five year average in 2017," he told Zawya in a telephone interview earlier this month.

"With the current level of oil prices, i.e. above $60 WTI, and now we're also seeing many brokerages lifting their oil price estimates to $70, we believe market earnings are set to improve."

Yet highlighting the overall performance of an individual country’s market indices masks deeper trends of capital flowing to favoured sectors and, of course, individual company performance. Using data from Thomson Reuters Eikon, we take a look at the best - and worst - performing equities in each market last year, gain analysts’ views on the factors which shaped their performance and highlight some of the companies likely to be making headlines again this year.

Qatar

The Qatar Exchange was the worst-performing of all seven GCC stock markets in 2017, declining by 18.3 percent. Its steepest decline took place in early June, in the days following the onset of a dispute between the country and four neighbouring states - Bahrain, Egypt, Saudi Arabia and the United Arab Emirates. The quartet accused the country of funding terrorism, which is something that Qatar denies, and they cut off access to air, sea and land routes to the country.

Unsurprisingly, then, two listed firms that witnessed their greatest declines in valuation last year were those involved in maritime-related activity. Shares in Gulf International Services, which offers drilling and helicopter hire to offshore and onshore oil and gas firms, lost more than half of their value in 2017 - dropping 56 percent. Its decline was followed closely by maritime and logistics firm Qatar Navigation, which fell by 55 percent. In fact, the only stock on the Qatar All Share Exchange that enjoyed a double-digit gain was the Doha-based medical products distributor Medicare Group, which rose in value by 11 percent.

Yet Bal Krishen, the chief executive officer of Century Financial Brokers, said that after a decline earlier in the year, real estate shares jumped in value by more than 35 percent in December, when Qatar's government announced a 2018 budget with a 29 billion riyal ($8 billion) allocation towards infrastructure project spending in preparation for the world cup.

"The banking and financial Services sector, which lost 7.9 percent in 2017, was up 9.28 percent in December," Krishen told Zawya via email last month. "Banks are expected to remain the key beneficiaries of the government’s huge project spending in 2018."

Oman

Oman's government is likely to be more constrained in its spending. All three major ratings agencies downgraded Oman last year, with S&P's last ratings action in November giving it a BB, or speculative-grade rating. S&P has downgraded Oman's debt by six notches since the onset of the sharp drop in oil prices in 2014, and in its MENA Sovereign Ratings 2018 report published last month it said that "we expect that its external debt will exceed its liquid external assets for the first time next year, and that the gap will widen until 2020".

Only seven of the listed stocks in the larger MSM 30 index increased in value last year, with Oman Fisheries being the star performer, recording 138 percent growth, followed by Al Madina Takaful (31 percent gain) and Oman United Insurance (18 percent gain).

Analysts from National Bank of Oman (NBO) last month produced a positive rating on Oman Fisheries, suggesting that there was further upside potential in its shares. The company sources fish from local fishermen and then processes, packs and markets these, exporting to more than 30 countries.

NBO's note said that growth drivers for the company include a rising population, a stated intention by the government to boost the country's fisheries industry as part of a diversification plan, and the fact that the company has boosted its cold storage facilities, and is increasing its volume of exports (only 27 percent of its product is sold in the Middle East).

Raysut Cement was hit by a number of weak earnings reports last year, Krishen said. Last month, it announced unaudited results for 2017 which show a 60 percent drop in profit to nearly 9.2 million Omani rials ($23.8 million) and a 22 percent drop in revenue to 71.9 million rials. The company did not comment on performance, but when publishing its nine-month results in November it blamed "severe" competition for lower sales, as well as disruption in neighbouring Yemen (to which it exports) and higher gas prices for its troubles.

Saudi Arabia

Cement firms in Saudi Arabia have also endured tough times as the kingdom's construction sector endured another tough year in 2017, with few new government contracts awarded as a reorganisation of procurement functions took place throughout major ministries. Southern Cement - one of the two biggest firms in the market, alongside Saudi Cement - witnessed the fourth-biggest decline in value lasts year, dropping by 41 percent. Its decline was only surpassed by Nama Chemicals (48 percent fall), Saudi Industrial Export Company (58 percent fall) and by stricken insurer Medgulf (59 percent fall). Last Thursday, Medgulf announced it was doubling the size of its share capital via a 400 million rights issue. This followed a move by regulators, who had banned the company from writing new insurance contracts until it increased its reserves.

The kingdom's top-performing equity last year, Dar Al Arkan Real Estate, saw its share price jump by 133 percent, with analyst Ayub Ansari, from Bahrain's Securities & Investment Company, stating that a turnaround in the company’s fortunes began in the third quarter, when it reported a major jump in revenue.

"They seemed to have taken a haircut on land prices just to boost land sales," he said.

Last week, the company reported a 120.6 percent increase in net profit for 2017, to 553.4 million Saudi rials ($147.5 million), which it said this was mainly due to higher property sales.

Ansari also said that there had been some excitement around the company's announcement in December of its first international project - a 34-storey residential tower in Dubai's Business Bay. The company has also announced plans to spin off its property management arm.

A little Extra

The next-highest gainer on Tadawul in 2017 was United Electronics - the retailer better known as Extra. It posted a net profit of 140.1 million riyals for 2017, compared to a loss of 2.1 million riyals for the prior year, as revenue beat analysts' expectations, climbing by 16.3 percent to over 1.6 billion riyals.

Nivedan Reddy Patlolla, an analyst with Al Rajhi Capital, said the company had benefitted from regulation enacted in September 2016 which effectively meant that only Saudis could be employed in sales roles in mobile phone retail shops. This made many smaller, independent stores much less profitable, forcing some to close, while the larger retailers in this space gained market share.

In a phone interview with Zawya earlier this month, he said Extra's management had previously been cautious on store rollouts because of weaker consumer spending. But the company, which has 43 stores, is now changing its approach.

"Going forward, we expect them to rollout two to three stores per annum, to take advantage of the changes to industry structure driven by regulatory changes," Patlolla said.

UAE

Abu Dhabi

Another victim of the dispute between Qatar and the quartet of neighbouring nations, including the UAE, was Commercial Bank International. The Abu Dhabi-based bank is majority-owned by UAE shareholders, including the Ras Al Khaimah government, and it continued to post sold results, posting a 40 percent increase in annual profit to 174.6 million UAE dirhams ($47.54 million) as interest income. But the fact that Qatar National Bank retains a 40 percent stake in the bank led to local sentiment turning against it - over the course of 2017, its shares declined in value by 54 percent, making it the biggest faller on the Abu Dhabi Securities Exchange.

It was followed by Gulf Medical Projects, whose shares underwent something of a rollercoaster ride following the sale of the company that runs Sharjah’s Al Zahra Hospital. It booked a 1.43 billion profit on the deal, which was completed in January, but its revenue has since declined as a result of the disposal.

Insurance firms were among both the best and worst performers on both the Abu Dhabi and Dubai markets last year. The UAE Insurance Authority's decision to set minimum pricing levels for auto insurance premiums meant an end to price wars in this sector, with many firms repeatedly reporting losses as the premiums charged often failed to cover claims.

Al Khaleej Investment Co, the Ras Al Khaimah-based company, saw its thinly-traded shares jump in value by 119 percent over the course of last year. Dana Gas was the third-best performer as its shares increased in price by 50 percent. Its controversial declaration that its $700 million sukuk was no longer shariah-compliant, and that it is not obliged to repay it, may still be working its way through the courts, but there were enough investors willing to bet on a successful outcome to increase the value of its shares.

Krishen argued that its improved performance was also due to a strong third quarter when the company reversed a provision it had made on payments from the Kurdistan Regional Government, following a settlement agreement. On Sunday, the company reported that it had reversed a loss of 323 million dirhams in 2016 into a profit of 305 million dirhams last year as revenue increased by 15 percent to 1.65 billion dirhams.

“With expected increase in oil and gasoline prices, Dana Gas is expected to perform well in 2018,” Krishen said.

Dubai

Education and healthcare firm Amanat was the biggest gainer on the Dubai Financial Market, rising in value by 51 percent, and despite the tough year for real estate, Damac Properties was the second-biggest climber, rising by over 30 percent over the course of the 12-month period. Mahmoud Rebai, an analyst with Tunisian equity research firm Alphamena, puts this down to three factors - the stock's inclusion in index compiler MSCI's emerging market index, a stable dividend distribution policy with 25 percent dividend payouts attracting high yield investors, and expectations of potential international expansion following chairman Hussain Sajwani's meetings with high-profile government figures in places like Malta and Croatia.

"AlphaMena believes that the stock is currently undervalued,” Rebai told Zawya via email last month, pointing out that it should recover losses to its share value that it (and other Dubai real estate firms) suffered during the Saudi corruption crackdown.

"Furthermore, Mr. Sajwani’s intention to sell a 15 percent stake in Damac Properties, if realised, would bring more liquidity to the stock and provide a fair pricing in the market," Rebai added.

The three main fallers were retailer Marka, which suffered heavy losses of 198.9 million dirhams on revenue of just 78.6 million dirhams in the nine months to September 30, contractor Arabtec, which underwent a major share recapitalisation programme that saw it raise 1.5 billion dirhams via a new rights issue in July, and DXB Entertainments.

The latter reported several successive quarters of disappointing results as visitor numbers to the park came in way below expectations. Even with heavy discounting in the latter part of the year, the park managed to achieve just 2.3 million visits in its first year of operation, considerably below the 6.7 million that DXB Entertainments told investors it was expecting to achieve in its IPO prospectus. On Sunday, the company posted a net loss of over 1.1 billion dirhams – twice the amount (552 million dirhams) it earned in revenue.

Bahrain

The Bahrain Bourse was only one of two Gulf markets to show a significant gain last year, climbing by 9.1 percent. This was spurred partly by a stronger performance from the country's banking sector. Although the top spot was taken by Aluminium Bahrain, whose shares climbed by almost 92 percent last year, buoyed by rallying global aluminium prices as China made noises about cutting production.

The company last week reported a 91 percent year-on-year increase in net profit to $246 million as sales climbed by 28 percent to $1.8 billion.

Five out of the top ten gainers on Bahrain's Bourse last year were banks, with investment bank BMB being the top performer, gaining in value by 85 percent over the year.

A note by BMI Research, a Fitch Group Company, last month said that Bahrain's commercial banks are likely to benefit from increased credit growth demand as the economy strengthens in 2018 - its forecast for real GDP growth for the country is 2.9 percent in 2018, up from an estimated 2.7 percent last year, and 2.1 percent in 2016. However, it sounded a warning on government demand for loans potentially crowding out the private sector.

"We are forecasting that credit to the domestic private sector will expand by 5 percent in 2018, up from an estimated 2 percent in 2017 but below the 11.9 percent annual average growth in the decade leading up to 2016."

Kuwait

Boursa Kuwait was the star performer of the main market indices last year, due (at least in part) to the boost it received following an inflow of foreign capital after the country’s stock market was included in emerging market indices by index compiler FTSE Russell. The weighted market index finished the year 5.6 percent higher, with the KW15 Index of the company's biggest firms topped by logistics company Agility, which gained in value by 40 percent last year. It was followed by Boubyan Petrochemicals, which increased in value by 34 percent on the back of rebounding oil prices.

Krishen said that despite the Opec/non-Opec agreement to curb oil production, which has underpinned the improvement in global pricing, "there are reports claiming that Kuwait Petrochemical Corporation is planning on investing $112 billion in the next five years to boost production”.

"Kuwait is seeking to increase production capacity from the current levels of 3.2 million barrels per day to four million barrels per day by 2020. Boubyan Petrochemical Co prices have surged almost 45 percent since the beginning of 2017 and had surged above four-year highs of 743 Kuwait dinars [$2,468] before retracing back. We expect long-term targets to be somewhere around the levels of 982 dinars."

National Bank of Kuwait was the third-fastest riser in the KW15 last year, gaining in value by 16 percent.

Krishen said that it had benefited from increased capital spending by the Kuwait government via the National Development Plan.

In late January, Kuwait set its budget for the 2018-19 financial year, which begins in April. It set a budget of 20 billion Kuwait dinars for the year, which included a 14.7 percent increase in capital spending to 3.6 billion dinars, of which 2.9 billion will be spent on construction projects.

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